If you’re juggling multiple debts, you’re not alone. Australia has one of the highest national debt-to-income ratios, with average household liability estimated at around $276,000 from 2021-2022. From tax debts to mortgages, personal finance loans to car loan repayments, most of us struggle sometimes under the weight of different financial obligations.
If you’ve been weighing up your options, “how do debt consolidation loans work?” might be a question at the forefront of your mind.
Fortunately the process of both applying for and paying off a debt consolidation loan is fairly simple. But it’s worth consulting a finance expert to find out if it’s right for your situation. It’s important to remember it doesn’t wipe out your existing debts but merely consolidates them into one easy-to-manage single repayment. If your debt consolidation loan involves refinancing your home loan, you can end up risking one of your most precious assets.
As Brisbane-based loan brokers, Time Home Loans can access your financial situation and determine whether a debt consolidation loan would suit you. If you’re eager to find out more information, here’s our guide to the question “how do debt consolidation loans work?”
The process of debt consolidation loans
A debt consolidation loan rolls all your separate debts such as credit card debts, personal loans and car loans into a single debt with only one interest rate. While you still need to repay the full principal amount owing on all of your debts, this is now taken out as one payment.
So how do debt consolidation loans work? Like any other loan, they begin with an application process.
First, check your outstanding balances, interest rates and minimum payments for each of your debts, as well as your credit score. Next, research different debt consolidation loans and options, such as refinancing your home loan and rolling in your other debts with your mortgage.
Many lenders offer an easy online application process, although you’ll need details such as your credit score, proof of income, former tax returns and living situation. The lender will review your details, and if your loan is approved, send you an offer with loan terms including the amount, interest rate and repayment schedule.
From that point on, you’ll only have one payment to make on a weekly, fortnightly or monthly basis in order to clear your debts and embark on the path to financial freedom. Speaking to a financial expert or loan broker, however, can take the stress out of the process and help you find the lender that can best meet your needs.
Benefits of a debt consolidation loan
Some advantages of a debt consolidation loan include:
A single personal loan
With only one loan to pay an installment on every month (and one interest rate), you have less to remember and a more straightforward path to a debt-free future in front of you. Having a consistent and predictable amount makes budgeting much easier month by month. You just have to choose a plan that’s realistic and affordable.
Smaller monthly repayments
By reducing the total interest on all loans and extending your payment plan, you have a smaller amount to pay each month. Just remember that if your payment plan stretches too long you’ll end up with more interest to pay in total.
Improving your credit score
Having multiple debts to pay off can harm your credit rating, particularly if you forget a payment. On the other hand, bundling them into one debt and paying it on time every month improves your credit rating.
Is a debt consolidation loan for you?
‘How do debt consolidation loans work for people in my situation?’ you may ask.
The right option isn’t always clear. If you have multiple debts from different lenders to deal with, a debt consolidation loan can certainly make paying what you owe a lot less stressful. On the other hand, if you don’t address the spending habits or circumstances that drove you into debt in the first place, you’re unlikely to see much improvement in your situation. It’s best to speak to a financial expert who can tell you if a debt consolidation loan will work for you.
Debt consolidation loans with Time Home Loans
If the question “how do debt consolidation loans work?” leaves you feeling a bit flummoxed or you just feel like you need some expert advice before making a major financial decision, Time Home Loans can help.
A nationally accredited finance brokerage, Time Home Loans offers over 50 secure banks and lenders. This allows us to find the bank that fits you, rather than making you fit the bank. With our Brisbane-based loan brokers on your side, you’ll potentially save thousands of dollars and thousands of hours of research as we do the hard yards so you can focus on what matters to you. We’ll find a deal that suits your personal finance situation and puts your financial wellbeing front and centre.
To find out more, book a personal and customised lending experience with the Time Home Loans team.